Masters in Business: US Fiscal Policy and the 'Deficit Myth' with Stephanie Kelton

Episode Release Date: March 13, 2025

In this enlightening episode of Bloomberg's "Masters in Business," host Barry Ritholtz engages in a comprehensive discussion with Professor Stephanie Kelton, a leading economist and proponent of Modern Monetary Theory (MMT). Their conversation delves deep into the intricacies of US fiscal policy, the prevailing myths surrounding government deficits, and the broader implications for economic stability and growth.

1. Introducing Stephanie Kelton

Stephanie Kelton, currently a Professor of Economics and Public Policy at SUNY Stony Brook, gained widespread recognition with her bestselling book, The Deficit Myth. The book challenges conventional economic perspectives on federal deficits, arguing that deficits are not inherently detrimental and can be instrumental in achieving economic goals.

Notable Quote:

“You have to look at people who approach the field from a different perspective.”
— Stephanie Kelton [02:17]

2. Kelton’s Academic Journey

Kelton's path to economics was unconventional. Initially aspiring to become a dentist, she shifted her focus to economics through a series of academic explorations and mentorships. Her experiences at institutions like Cal State Sacramento, Cambridge University, and the New School in New York shaped her heterodox views, aligning her with thinkers like Hyman Minsky and Warren Mosler.

Notable Quote:

“I think you just think, you know, what do you do for a living where you have decent income and you know there's going to be a job.”
— Stephanie Kelton [05:20]

3. Understanding the Deficit Myth

At the heart of Kelton’s thesis is the assertion that government deficits are not equivalent to household deficits. Unlike households, sovereign nations that issue their own currency can sustain deficits without the immediate fear of insolvency. Kelton emphasizes that deficits can be used strategically to address critical areas like infrastructure, healthcare, and education.

Notable Quote:

“Every deficit is good for someone.”
— Stephanie Kelton [29:31]

4. Deficits and Economic Impact

Kelton distinguishes between the roles of fiscal and monetary policy, arguing that fiscal stimulus has a more direct impact on economic activity. She critiques the reliance on metrics like the debt-to-GDP ratio, highlighting cases like Japan, which sustains high debt levels without the anticipated negative consequences such as rampant inflation or economic stagnation.

Notable Quote:

“I just don't think the ratio is a very useful metric in terms of, you know, thinking about when you've, quote, unquote, gone too far.”
— Stephanie Kelton [32:09]

5. Critique of Traditional Economic Metrics

Kelton challenges traditional economic indicators, such as the debt-to-GDP ratio, arguing they do not accurately reflect the economic realities of sovereign nations. She uses Japan as a case study to illustrate how high debt levels can coexist with economic stability when managed appropriately through monetary policy.

Notable Quote:

“The truth is that it's just we've got so much of it wrong that that's been the reason that all these bad things that were supposed to happen kept not happening.”
— Stephanie Kelton [32:09]

6. Modern Monetary Theory (MMT) and Public Policy

MMT posits that governments can and should use fiscal policy to achieve full employment and economic stability. Kelton advocates for policies that focus on spending to harness economic potential rather than viewing deficits as inherently negative. She also discusses automatic stabilizers, such as a job guarantee program, to mitigate involuntary unemployment.

Notable Quote:

“Unemployment is always a policy choice.”
— Stephanie Kelton [51:58]

7. The Role of Taxes in MMT

Contrary to traditional views, Kelton explains that taxes are not primarily for funding government expenditures but serve to regulate inflation by controlling the purchasing power within the economy. She critiques proposals to use taxes as a means to offset deficits, emphasizing instead their role in managing economic demand.

Notable Quote:

“Taxes are important because they pull money out and are one potential way to regulate inflationary pressure.”
— Stephanie Kelton [55:40]

8. Fiscal Stimulus and Inflation

Addressing concerns about fiscal stimulus leading to inflation, Kelton argues that during the COVID-19 pandemic, supply-side constraints were the primary drivers of inflation rather than demand-side factors like fiscal stimulus. She contends that appropriately managed fiscal policies can support the economy without necessarily causing rampant inflation.

Notable Quote:

“I think, you know, the truth is it was pandemic related. It was pandemic related.”
— Stephanie Kelton [35:22]

9. Historical Context and Austerity

Kelton provides a historical analysis of austerity measures, particularly critiquing the post-2008 financial crisis policies that favored budget surpluses over stimulus. She highlights the dangers of relying solely on private sector deficit spending, which can lead to fragile economic conditions susceptible to downturns.

Notable Quote:

“It's just what Keynes told us in 1936. It's a lack of effective demand.”
— Stephanie Kelton [59:00]

10. Modern Challenges and Policy Recommendations

In light of ongoing economic challenges, including potential federal layoffs and their ripple effects, Kelton emphasizes the importance of proactive fiscal policies. She advocates for government-led initiatives to sustain employment and economic activity, stressing that such measures can act as buffers against economic shocks.

Notable Quote:

“You have to remember that if you truly wanted to eradicate, I mean, big thinking, right, involuntary unemployment… you can eliminate involuntary unemployment.”
— Stephanie Kelton [53:01]

11. Conclusion and Future Outlook

Kelton concludes by reiterating the necessity of re-evaluating traditional economic doctrines through the lens of MMT. She urges policymakers to prioritize inflation management over deficit concerns and to adopt more flexible fiscal strategies to foster sustainable economic growth.

Notable Quote:

“If you're doing this in a fiscally responsible way with an MMT lens, you're not asking, how do I ensure that my spending is deficit neutral. You're asking, how do I ensure that my spending will be inflation neutral.”
— Stephanie Kelton [82:56]

Key Takeaways:

• Deficits Are Not Inherently Bad: Sovereign nations with their own currency can utilize deficits strategically without the immediate risk of insolvency.

• Reevaluating Economic Metrics: Traditional indicators like the debt-to-GDP ratio may not effectively measure fiscal health for sovereign nations.

• Role of Fiscal Policy: Emphasizing government-led fiscal initiatives can achieve full employment and economic stability more effectively than relying solely on monetary policy.

• Taxes as Economic Tools: Taxes should be viewed as instruments to regulate economic demand and control inflation rather than mere revenue sources.

• Historical Lessons: Past austerity measures have often led to fragile economies, underscoring the need for balanced fiscal strategies.

This episode offers a profound reassessment of long-held beliefs about fiscal policy and government deficits. Stephanie Kelton's insights challenge listeners to rethink economic paradigms and consider more sustainable approaches to managing national economies.